Deswita Triana Ceisilia

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Dasar-dasar Akuntansi

Resume Chapter 5

Merchandising Operations
Merchandising companies that purchase and sell directly to consumers are called retailers.
Merchandising companies that sell to retailers are known as wholesalers. The primary source of revenue
for merchandising companies is the sale of merchandise, often referred to simply as sales revenue or
sales. A merchandising company has two categories of expenses: cost of goods sold and operating
expenses. Cost of goods is the total cost of merchandise sold during the period. This expense is directly
related to the revenue recognized from the sale of goods.

Less
Sales Revenue

Cost of Goods Equals Gross Less

Sold Profit

Operating
Expenses

Equals

Net Income
(Loss)

Operating Cycles
The operating cycles of merchandising company ordinarily is longer than of a service company.
The added asset account for a merchandising company is the inventory account.
Flow of Cost for a Merchandising Company
Beginning inventory + cost of goods purchased = the cost of goods available for sale. As goods
are sold, they are assigned to cost of goods sold. Those goods that are not sold by the end of the
accounting period represent ending inventory.

Companies use one of two systems to account for inventory: 1) perpetual inventory system; or 2)
periodic inventory system
1. Perpetual inventory system, those companies keep detailed records of the cost of each
inventory purchase and sale. These records continuously—perpetually—show the inventory
that should be on hand for every item. Under a perpetual inventory system, a company
determines the cost of goods sold each time a sale occurs.

2. Periodic inventory system, those companies do not keep detailed inventory records of the
goods on hand throughout the period. Instead, they determine the cost of goods sold only at
the end of the accounting period. To determine the cost of goods sold under a periodic
inventory system, the following steps are necessary:

a. Determine the cost of goods on hand at the beginning of the accounting period.
b. Add to it the cost of goods purchased.
c. Subtract the cost of goods on hand at the end of the accounting period.

3. Additional considerations
The perpetual inventory system is so named because the accounting records continuously-
perpetually-show the quantity and cost of the inventory that should be on hand at any time. A
perpetual inventory system provides better control over inventories than a periodic system.
The inventory records shows the quantities that should be on hand, the company can count
the goods at any time to see whether the amount of goods actually on hand agrees with the
inventory records.

Recording Purchases of Merchandise

A purchase invoice should support each credit purchase. This invoice indicates the total purchase price
and other relevant information. However, the purchaser doesn’t prepare a separate purchase invoice.
Instead, the purchaser uses as a purchase invoice a copy of the sales invoice sent by the seller.

Under the perpetual inventory system, companies record purchases of merchandise for sale in the
inventory account. Not all purchases are debited to inventory. Companies record purchases of assets
acquired for use and not for resale (such as: supplies, equipment, and similar items), as increases to
specific asset account rather than to inventory.
Freight Costs
Freight terms are expressed as either FOB shipping point or FOB destination. The letters FOB means free
on board. Thus, free on board means that the seller places the goods free on board the carrier, and the
buyer pays the freight costs. FOB destination means that the seller places the foods free on board to the
buyer’s place of business and the seller pays the freight.

1. Freight costs incurred by the buyer, when the buyer incurs the transportation costs, these costs are
considered part of the cost of purchasing inventory. The buyer debits (increases) the account
inventory. Any freight costs incurred by the buyer are part of the cost of merchandise purchased.
Inventory cost should include all costs to acquire the inventory, including freight necessary to
deliver the goods to the buyer.
2. Freight costs incurred by the seller, in contrast, freight costs incurred by the seller on outgoing
merchandise are an operating expense to the seller. The costs increase an expense account titled
Freight-Out or Delivery Expenses.

Purchase Returns and Allowances

Purchase return is occurred when a purchaser may be dissatisfied with the merchandise received because
the goods are damaged or defective, of inferior quality, or don’t meet the purchaser’s specifications, then
the purchaser’s return the goods to the seller for credit if the sale was made on credit, or for a cash refund
if the purchase was for cash.
Purchase allowance is a situation when a purchaser may be dissatisfied with the merchandise received,
the purchaser can choose to keep the merchandise if the seller is willing to grant an allowance (deduction)
from the purchase price.

Purchase discounts
The credit terms of purchase on account may permit the buyer to claim a cash discount from prompt
payment. The buyer calls this cash discount a purchase discount. This incentive offers advantages to both
parties: the purchaser saves money, and the seller shortens the operating cycle by more quickly
converting the accounts receivable into cash.

Credit terms specify the amount of the cash discount and time in which it is offered. They also indicated
the time period in which the purchaser is expected to pay the full invoice price. Alternatively, the discount
period may extend to a specified number of days following the month in which the sale occurs. When the
seller elects not to offer a cash discount for prompt payment, credit terms will specify only the maximum
time of period for paying the balance due. When the buyer pays an invoice within the discount period, the
amount of the discount decreases inventory. Because companies record inventory at cost and by paying
with the discount period, the merchandiser has reduced that cost.
Recording Sales of Merchandise
In accordance with the revenue recognition principle, companies record sales revenue when the
performance obligation is satisfied. The performance obligation is satisfied when the goods transfer from
the seller to buyer. At this point, the sales transaction is complete and the sales price established.
Sales may be on credit or for cash. A business document should support every sales transaction, to
provide written evidence of the sale. Cash register tapes provide evidence of cash sales. A sales invoice
provides support for credit sale. The original copy of the invoice goes to the customer, and the seller
keeps a copy for use in recording the sale.
The seller makes two entries for each sale:
1. First entry records the sale: the seller increases (debits) cash (or account receivable, if a credit
sale), and also increases (credits) sales revenue.
2. Second entry records the cost of the merchandise sold: the seller increases (debits) cost of goods
sold, and also decreases (credits) inventory for the cost of those goods. As a result, the inventory
account will show at all times the amount of inventory that should be on hand.
For internal decision-making purposes, merchandising companies may use more than one sales account.
On its income statement presented to outside investors, a merchandising company normally would
provide only a single sales figure-the sum of all its individual sales accounts. This is done for two
reasons:
1. Providing detail on all of its individual sales accounts would add considerable length to its
income statement.
2. Most companies do not want their competitors to know the details of their operating results.

Sales Returns and Allowances

Sales returns and allowances is a contra revenue account to sales revenue. The normal balance of sales
returns and allowances is a debit. Companies use a contra account, instead of debiting sales revenue, to
disclose in the accounts and in the income statement the amount of sales returns and allowances.
Moreover, a decrease (debit) recorded directly to sales revenue would obscure the relative importance
sales in different accounting periods.

Sales Discount
The seller may offer the customer a cash discount-called by the seller a sales discount- for the prompt
payment of the balance due. Sales discount is based on the invoice price less returns and allowances, if
any. The seller increases (debits) the sales discounts account for discount that are taken. Sales discount is
also a contra revenue account to sales revenue. Its normal balance is a debit.

Completing the Accounting Cycle

Adjusting Entries
At the end of each period, for control purposes, a merchandising company that uses a perpetual system
will take a physical count of its goods on hand. The company’s unadjusted balance in inventory usually
does not agree with the actual amount of inventory on hand. The perpetual inventory records may be
incorrect dure to recording errors, theft, or waste. Thus, the company needs to adjust the perpetual records
to make the recorded inventory amount agree with the inventory on hand. This involves adjusting
inventory and cost of goods sold.

Closing Entries
A merchandising company closes to income summary all accounts that affect net income. In journalizing,
the company credits all temporary accounts with debit balances, and debits all temporary accounts with
credit balances.

Forms of Financial Statements

Income Statement
The income statement is a primary source of information for evaluating a company’s performance. The
format is designed to differentiate between the various sources of income and expense.

Income Statement Presentation of Sales

The income statement begins by presenting sales revenue. It then deducts contra revenue accounts—sales
returns and allowances, and sales discounts—to arrive at net sales.

Gross Profit
Companies deduct cost of goods sold from sales revenue to determine gross profit. For this computation,
companies use net sales (which takes into consideration Sales Returns and Allowances and Sales
Discounts) as the amount of sales revenue. We also can express a company’s gross profit as a percentage,
called the gross profit rate. To do so, we divide the amount of gross profit by net sales.
Gross profit represents the merchandising profit of a company. It is not a measure of the overall
profitability, because operating expenses are not yet deducted.

Operating Expenses
Operating expenses are the next component in the income statement of a merchandising company. They
are the expenses incurred in the process of earning sales revenue. Many of these expenses are similar in
merchandising and service companies.
Other Income and Expenses
1. Other income such as:
- Interest revenue from notes receivable and marketable securities.
- Dividend revenue from investments in ordinary shares.
- Rent revenue from subleasing a portion of the store.
- Gain from the sale of property, plant, and equipment.
2. Other expenses such as:
- Casualty losses from causes such as vandalism and accidents.
- Loss from the sale or abandonment of property, plant, and equipment.
- Loss from strikes by employees and suppliers.

Interest Expense
Financing activities, which result in interest expense, represent distinctly different types of cost to a
business. In evaluating the performance of a business, it is important to monitor its interest expense. As a
consequence, interest expense, if material, must be disclosed on the face of the income statement.

Comprehensive Income
These excluded items are reported as part of a more inclusive earnings measure, called comprehensive
income. Examples of such items include certain adjustments to pension plan assets, gains and losses on
foreign currency translation, and unrealized gains and losses on certain types of investments. Items that
are excluded from net income, but included in comprehensive income, are either reported in a combined
statement of net income and comprehensive income, or in a separate schedule that reports only
comprehensive income.